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China’s
economy is a 'bright spot' in global growth and is projected to grow
at a rapid 9½% this year, remains on a strong footing, propelled by
vigorous domestic and external demand, the IMF said in its
latest assessment.

But China’s key policy
challenge now will be to accelerate the ongoing transformation of
its economic model toward one that is more linked to domestic
consumption and less reliant on exports and investment, the Fund aid
at the conclusion of its annual Article IV discussions on the
economy.

“China
continues to be a bright spot in global growth,”
said IMF acting managing director John Lipsky at a Beijing press
conference. “We see this continuing and,
thus, maintain our growth forecast for both this year and next at
around 9½%. Inflation has clearly become a much more pressing social
concern over the past year. However, we expect that many of the
drivers behind inflation will soon start to dissipate and inflation
should fall to around 4% by year-end.”

Lipsky praised China’s
part in helping counter the global recession through extra
government spending. More recently, the steps taken by the Chinese
authorities to tighten monetary policy, normalize credit growth, and
withdraw fiscal stimulus were fully appropriate.

“The measures
that the authorities have progressively taken to slow down the rise
in real estate prices are having the desired impact,”
he told reporters. “However, China still
has a propensity for property bubbles driven by high savings, cheap
financing, low carrying costs, and the lack of alternative
investment instruments. Any durable solution will need to involve
broader financial development, a higher cost of capital, and
increased real estate taxation.”

Emphasis on the
financial sector

The IMF team, led by
Nigel Chalk, senior advisor of the Asia and Pacific Department,
visited Beijing, Shanghai, and Chengdu from May 23 to June 9 to
conduct the annual review.

Lipsky and Anoop Singh,
director of the Asia and Pacific Department, joined the final policy
discussions and met with Vice Premier Wang Qishan, People’s Bank of
China Governor Zhou Xiaochuan, and Finance Minister Xie Xuren.

Citing the FSAP
analysis, Chalk said it showed that important progress has been made
in moving to a more market-based financial system. Nevertheless,
China still confronts the risk of a steady buildup of financial
sector vulnerabilities.

“The complexity
of the system is growing and there are limitations in terms of data
collection, monitoring of systemic issues, and information exchange.
There are also well known near-term risks arising primarily from the
recent credit expansion, off-balance sheet exposures, the rapid
increase in real estate prices, and potential external spillovers,”
he said. The FSAP findings point to the need to expand the
regulatory and supervisory perimeter, improve coordination among
regulatory agencies, and revamp the financial stability and crisis
management framework.

Equally importantly,
Chalk underlined the importance of reform and liberalization of the
financial system as a means to ensure a smooth transformation in
China toward a more inclusive growth model that is focused on
improving people’s livelihoods. According to the IMF, a roadmap for
this process of financial reform should include a stronger monetary
policy framework, improvements in the regulatory, supervisory, and
financial stability frameworks, a deepening of financial markets,
and eventually moving to an open capital account with the renminbi
as a fully convertible currency. This is a huge task and financial
sector development would need to be well sequenced and handled
carefully. However, it offers significant payoffs in terms of
China’s long term economic growth and performance.

Reduced surplus

In the wake of the
financial crisis, China’s current account surplus has fallen
significantly. Lipsky said it would be important for China to deploy
a package of policies in the coming years to prevent that surplus
from rebounding.

Lipsky noted that
“Many of the policies that will be needed are mentioned in the
government’s latest Five-Year Plan. They include measures to further
strengthen the social safety net, particularly pensions and
healthcare; raise the cost of capital, energy, and other factors of
production; and find ways to increase household income,”

“A stronger
renminbi will be a key ingredient of this comprehensive package of
reforms and would very much be in China’s interest,”
he added.

China—a
growing impact on the world

The IMF is also
undertaking spillover analysis of the world’s five largest economies
- - Japan, China, the United States, the Eurozone and the United
Kingdom - - as part of its annual Article IV discussions with these
countries. This innovation is intended to strengthen analysis of
economic and policy interactions across large countries in the wake
of the global financial crisis. Lipsky was in London on June 6 for
release of the
U.K.’s annual health check and visited
Tokyo June 7–8. The Eurozone and U.S. visits will follow later
this month.

For China, the IMF says
the spillover analysis puts in a global context why transforming
China’s economic growth model is so important to the rest of the
world. The positive outward spillovers from China will undoubtedly
increase and contribute significantly toward a strong, sustained,
and balanced global growth if economic transformation is managed
successfully.

“However, so do
the stakes for the global economy if that process proceeds too
slowly or in the event that stresses from the current policy
framework cause disruptions in China,”
Lipsky said.